It's energy that will make or break the BRICs

December 15, 2011 | 00:00

It's energy that will make or break the BRICs

The future of the world economy (including the global energy market) depends increasingly on how the partnership of the BRIC countries will develop. Of course Brazil, Russia, India and China hardly form a natural 'bloc', yet the BRIC acronym has acted to some extent as a self-fulfilling prophecy, corralling the four emerging economies into an uneasy alliance. But how far this partnership can go, depends more than anything else on the energy relations between the four countries, argues Matthew Hulbert. It is ultimately how they will play out their energy interests that will come to define - or destroy - BRIC relations.

BRIC leaders Manmohan Singh (I), Dmitry Medvedev (R), Hu Jintao (C) and Dilma Rousseff (B) 

On the face of it, the BRICs provide a perfect division of labour in the energy sector. Russia and Brazil are or will be key exporters, while China and India are the consummate consumers.

For Eurasia the logical tie up is obvious: Russia should become the hydrocarbon provider of choice for China. Brazil as the new energy giant of Latin America should also be well placed to feed Asian markets above and beyond the Western hemisphere.

On the demand side, China and India would clearly benefit from a cohesive Asian voice. The potential for a BRIC energy partnership is thus enormous. Russia and Brazil pump it up, India and China provide the receipts.

So much for the theory. The only problem is that no common BRIC vision exists on the energy front. Quite the reverse.

Take Russia and China first. Despite Russia’s need to develop her East Siberian reserves and for China to import vast amounts of Russian hydrocarbons, Moscow and Beijing have found it impossible so far to strike credible agreements on gas volumes and price. Beijing has been far busier opening up new supply routes in Central Asia, trying to increase its influence in the region and reducing Russian clout. Prolific Middle Eastern and Australian supplies are also helping Beijing to drive a hard Russian bargain. Moscow has responded by dropping hints about LNG options for its Eastern fields to leapfrog Chinese markets. No one is fooled – China holds the arbitrage aces over Russia for now.

Brazil has played with a straighter energy bat, attracting considerable international investment into its pre-salt deepwater finds. But as the race for the Latin America crown heats up, expect resource nationalism to rise and strategic control of resources to tighten. Brazil might even go for OPEC membership, particularly if it is squeezed too hard by consumers.

For their part India and China are engaged in a hostile upstream battle to gain strategic ascendency in the ‘Chindia’ game. Delhi hasn’t been able to claim many serious upstream stakes, as the Chinese have been snapping up concessions and equity deals far beyond India’s reach. This while Indian import dependency is considerably worse than China’s in percentage terms, which explains why the Singh government is giving serious thought to setting up a $280 billion fund to win upstream deals. Far from cutting India some energy slack, China is increasing its maritime presence in the Indian Ocean – the strategic resonance of which has not been lost on Delhi, which is all too aware that any land-based pipelines into India would need to traverse geopolitically vexed Afghan and Pakistani terrain.

The bottom line: BRIC supply isn’t being calibrated to BRIC demand.

Energy-based cement

None of this would really matter, except that energy is pivotal to BRIC ascendancy. Everyone knows that since the BRICs were invented by Goldman Sachs economist Jim O'Neill, in 2001, they have been little

The bottom line: BRIC supply isn't being calibrated to BRIC demand
more than a vehicle to gain greater leverage in the G7 and other corridors of global financial and political power. The idea was never to move or act as a collective vehicle, but rather to piggyback each other as means to achieve tandem gains. They may not have worked as a single unit, but at the same time no ally was left in splendid isolation either.

Such an approach was all good and well for the first decade of the century, but with the Eurozone in a state of crisis and the US economy in similarly bad shape, the real question for the BRICs (and indeed the G20) is whether they are willing to step up a gear. Are they able and willing to define new rules of economic and political governance, or are they going to play out time and merely act as a hedge to the increasingly dysfunctional and discredited G7 way of (un)doing business?

If the BRICs want to get serious, then energy will be a core factor driving economic and political linkages across the respective capitals. Energy is not just one potential policy area where BRIC cooperation could be made to work, but arguably an essential component for mutual political gains and economic growth. Russia’s structural hydrocarbon dependence means effective export strategies to the East are crucial to its international standing, and never more so than now, with internal political cracks appearing in Moscow. Brazil will need to use its resource (oil and biomass) endowments wisely if it’s to become a global player. And irrespective of unconventional resources popping up in China and India, both nations need to import vast amounts of oil and gas to maintain domestic growth and enhance their international status.

True BRIC believers will no doubt point out that Brazilian and Russian supplies will inexorably lean towards Asian demand under the iron law of market fundamentals. That maybe so in the long run, but whether a BRIC bloc is still standing by that time, could well depend on reaching timely political accommodation on the energy front. The longer the BRICs go without energy-based cement to shore up political foundations, the larger the BRIC cracks will become. If they want to become a serious political entity, the BRICs will need to act with strategic purpose on the energy front.

Two-way street

All sides of the BRIC equation undoubtedly need to be factored into the energy debate, but China is the King on the BRIC energy board. China’s energy footprint is truly global, its demand is enormous, and – not unimportantly – Beijing still has to work out what to do with its US$3 trillion reserves to kick its dollar addiction. It could do worse than channel more cash into BRIC markets with energy as the primary vehicle.

Yet BRIC ascendency will not happen if it is not a two-way street. Beijing will have to give India more room to sign concessions (and even joint ventures) to defuse tensions in the Indian Ocean. In turn,

If the BRICs want to get serious, then energy will be a core factor driving economic and political linkages across the respective capitals
India needs to realise that it is the secondary player in the Chindia game and act accordingly. Both countries would have to develop a broader (and more realistic) understanding of maritime security to avoid an ugly Indian Ocean naval race that will eventually stretch to the Gulf of Aden if things aren’t kept in check.

On the supply side, continued investment in Brazilian blocs from China would help to keep Brasilia in the BRIC game. China has already sunk $10billion into Petrobas. Making sure Brazil keeps a keener focus on BRIC designs rather than Venezuelan distractions will be a critical part of tying the Brazilian government into Chinese designs. The fact that there is already talk of an IBSA grouping along democratic lines (spanning India, Brazil and South Africa) rather than hardnosed interests, shows that Brazilian allegiance and acquiescence to BRIC (i.e. Chinese) ambitions is by no means a given.

But the real supply side clincher would be for Beijing to hardwire Russia into its supply mix. Swap agreements could be the key to resolving the current pricing disputes between the two nations, given Chinese oil majors’ desire for equity stakes and Russia’s clear need to make Eastern export strategies a runner. The positive side effect for China would be to reduce bilateral Moscow-Beijing tensions in Central Asia. From a BRIC perspective, status quo politics and security should be the overriding Sino-Soviet interest in the Stans, not fighting each other for strategic control over natural resources. The sooner Russia and China do serious energy business, the quicker Central Asian tensions will abate. India could then pick up any excess hydrocarbon supplies from Eurasia without treading on Chinese toes. Beijing would also be free to drive a harder bargain with other hydrocarbon providers once Russia is firmly on the books.

Risks for Europe

But forging the BRICs into a geopolitical juggernaut with energy as the main centrifugal force, rather than geo-economic free-for-all prone to centripetal glitches, will not be easy. More than anyone, China will need to decide how far the BRIC narrative could and indeed should, be carried. Rather like other political unions knocking around today, if the BRICs are to become more than the sum of its parts, then someone has to do the heavy lifting. That someone will have to be China - albeit with Russia, India and to a lesser extent Brazil, playing supportive (aka subordinate) role. Should energy questions be left unresolved, the BRICs will never become more than a clever acronym invented by a clever Goldman Sachs economist.

Where does all this leave Europe? BRIC growth might help to pull Europe out of the debt-ridden gutter to some degree, but from an energy perspective, it also creates major risks. The core European concern is that if Russia and China strike serious agreements on gas, then the potential for Russia to lord it over its traditional European demand base is obvious. Talking to Beijing about cohesive supply
The core European concern is that if Russia and China strike serious agreements on gas, then the potential for Russia to lord it over its traditional European demand base is obvious
side action will be crucial for Brussels to check Russian arbitrage ambitions. More positively, a BRIC energy alignment between Beijing and Moscow could open up a little more space for European access to Central Asian reserves. Middle East and (more importantly) North African supplies and places such as Kurdistan would also be less pressing jurisdictions for the likes of China and India to chase.

In any case, whether or not BRICs will ever form a more perfect union, there can be little doubt that emerging markets will increasingly define and redefine Europe’s geopolitical, geo-economic and energy role in the world.The question for Europe is not so much what form this will take, but how to navigate a process already in motion.


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